A World Tour of Economic Data

From European inflation to Chinese monthly data and Indian gross domestic product (GDP, governments’ economic output measure), data releases abound of late. Here we will round them up, in a world tour of sorts, sharing brief thoughts on each. The general picture, in our view, is one of continuing improvement in overall inflation (economy-wide price increases) and growth, even if a few soft patches exist. Let us show you.

In Europe, the headliner is inflation. Specifically, as Exhibit 1 shows, that eurozone inflation continues to decelerate—quickly. Fast-rising prices have long dominated headlines we follow in America, Britain, Australia, Canada and, yes, the eurozone. But as is also the case globally, eurozone inflation rates have cooled significantly lately. The eurozone’s November Harmonised Index of Consumer Prices (HICP) has fallen all the way back to 2.4% y/y from its 10.6% October 2022 peak. It is now at its slowest rate since July 2021. Energy prices, which led the way higher in 2022, are now driving inflation’s slowdown, falling over -11% y/y the last two months.^[i] But even excluding energy (and food, alcohol and tobacco), core HICP is running at just 3.6% y/y, a vast improvement from March’s 5.7% peak. And although inflation remains above long-term averages—and the ECB’s 2% target—we think falling money supply trends point to still-slower rates to come, with some economists we read even starting to warn of an overshoot to too-low inflation.^[ii]

Exhibit 1: Europe’s Big Inflation Alarm Has Faded

Source: FactSet, as of 7/12/2023. Eurozone HICP and HICP excluding energy, food, alcohol & tobacco, January 1997 – November 2023.

Lately, it seems to us fading inflation—in Europe and globally—has gotten lost amidst signs of recent economic weakness rekindling recession (economic contraction) worries. But we view this as a classic alarm morph—and unappreciated market tailwind. Headlines we follow are downplaying clear improvement in Europe’s big perceived negative the last couple years, only to recycle another stocks long ago pre-priced, which we think shows the bull market (broad overall rise in equity markets) has further to climb. Warnings about the economy tend to keep expectations low, making the positive surprise that we think fuels bull markets easier to attain.

Next stop: China, where few commentators we read seem to notice economic reacceleration. The general consensus toward the Middle Kingdom’s economy is exceedingly gloomy, in our view, fixated on real estate weakness, warning it will spur debt deflation and a hard landing. Notably to us, though, whilst these warnings have reigned for years, economic activity is proving more resilient. (Exhibit 2) The latest Chinese data show industrial production grew 4.6% y/y in October, faster than September’s 4.5%, whilst retail sales accelerated to 7.6% from 5.5%.

Exhibit 2: Chinese Growth Weathering the Storm

Source: FactSet, as of 7/12/2023. China industrial production and retail sales, March 2012 – October 2023.

Although China’s official manufacturing purchasing managers’ index (PMI) continued to hover just below 50 in November, suggesting contraction, that hasn’t kept the sector’s actual output from expanding every month this year—a reminder that PMIs measure only growth’s breadth, not its magnitude.^[iii] Besides, the non-manufacturing PMI has exceeded 50 all year, suggesting ongoing expansion for sectors comprising the majority of Chinese GDP.^[iv] And Tuesday, the Caixin Services PMI, reflecting China’s private sector more than its state-owned enterprises, showed a November rise to 51.5 from October’s 50.4, beating estimates.^[v] Importantly, new orders—a sign of future output—headed higher.^[vi]

In our view, Chinese growth appears to be increasingly able to weather its real estate storm, even as the threat recedes (with some targeted help from Beijing). China continues chugging along, adding to global growth.^[vii] We think this is a major ingredient for reality worldwide to exceed widespread projections to the contrary.

Beyond China, we find a visit to fellow Emerging Markets heavyweight India reveals a continued boom. Q3 GDP grew 7.6% y/y, exceeding all estimates and extending last quarter’s strength.^[viii] This makes it the fastest-growing major economy in the world and a big support to global growth.^[ix] Now, the Reserve Bank of India (RBI) is pushing to cool the expansion.^[x] It cites unsecured consumer lending (credit cards, small personal loans) growing in excess of 25% over the past year, far outpacing household incomes.^[xi] Hence, the RBI is hiking rates—and financial institutions’ capital requirements—to rein in booming credit creation it views as increasingly risky, particularly with delinquencies on the rise.^[xii]

Whether lenders pass on the costs or take the margin hit, unsecured borrowing seems likely to slow.^[xiii] However, the RBI left capital requirements unchanged for secured lending—e.g., for housing and cars—and, at more than three-quarters of the retail loan market, this form of credit far outweighs unsecured borrowing.^[xiv] Whilst we will continue to monitor the impact on loan growth—and delinquency rates—the overall effect this has on India’s economy appears minimal to us. At a stock market level, it is worth noting Financials are a huge share of India’s markets (more than a quarter of market capitalisation), so the impact on profitability is worth keeping an eye on going forward.^[xv]

Lots of headline warnings may swirl, drawing attention, but don’t lose sight of the bigger picture—and good news—that many miss.